Debts, Security, Priorites
Credit plays a significant role in our economy; unfortunately so too does insolvency and red ink. Therefore it is important that creditors have an understanding of the laws that govern debt, security and priorities. In this article we introduce you to three key pieces of legislation. In future editions of Legal Issues we will look at each of these Acts in more depth.
Bankruptcy & Insolvency Act
The Bankruptcy and Insolvency Act (BIA), which is a federal law, ensures a fair distribution of a bankrupt’s property among its creditors.
The BIA can be brought into play in one of three ways. An insolvent business can enter a voluntary bankruptcy by making an assignment in bankruptcy. The second process allows one or more of the insolvent business’s creditors to petition it into bankruptcy. The third scenario involves a proposal by the insolvent business to its creditors.
Under the BIA, secured creditors have priority over other creditors and are entitled to realize their security. If there are assets that remain, once the secured creditors have been paid, they will be distributed according to the scheme of distribution set out in the Act.
Companies’ Creditors Arrangement Act
The Companies’ Creditors Arrangement Act (CCAA), which is federal legislation, applies to companies who owe its creditors more than $5 million. One of the Act’s main purposes is to allow a company time to try and arrange its affairs and resolve its financial problems while remaining a going concern.
Pursuant to the CCAA, a debtor company can seek permission from the court to file a restructuring or reorganization plan. This plan is a formal arrangement with the creditors such that it stays the creditors’ ability to seek payment from the company. The creditors will vote to approve the arrangement and the Bankruptcy Court will decide if the application is acceptable.
If the proposed plan is not accepted then the company can be petitioned into receivership or bankruptcy.
Personal Property Security Act
The Personal Property Security Act (PPSA) is provincial legislation. Unlike the BIA and the CCAA it does not deal with insolvent companies, however like those Acts, the PPSA does create a process for determining priorities among secured creditors, who have an interest in the same personal property.
The PPSA sets out a series of steps to protect a lender’s rights in collateral against third parties. For the creditor’s security interest to attach in the collateral, the debtor must sign a security agreement which contains a description of the collateral that the debtor has some right in. Once the security interest has attached and a financing statement has been registered in the province’s registry system, the security interest is perfected. The secured creditor then has priority over trade creditors or other unsecured creditors as well as future secured creditors against this specific collateral.
If you are advancing funds it is important that you are aware of your rights in the event the debtor defaults on the loan or becomes insolvent. While this area of the law may appear straightforward it can in fact present many challenges, therefore it is important to obtain sound legal advice.
For further information please contact Howard Steinberg or Craig Colraine.Share